Intrinsic value of Netease ADR - NTES

Previous Close

$282.58

  Intrinsic Value

$2,535

stock screener

  Rating & Target

str. buy

+797%

  Value-price divergence*

-83%

Previous close

$282.58

 
Intrinsic value

$2,535

 
Up/down potential

+797%

 
Rating

str. buy

 
Value-price divergence*

-83%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of NTES stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 36.9

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  67.41
  49.40
  44.96
  40.96
  37.37
  34.13
  31.22
  28.60
  26.24
  24.11
  22.20
  20.48
  18.93
  17.54
  16.29
  15.16
  14.14
  13.23
  12.40
  11.66
  11.00
  10.40
  9.86
  9.37
  8.94
  8.54
  8.19
  7.87
  7.58
  7.32
  7.09
Revenue, $m
  5,523
  8,251
  11,961
  16,861
  23,161
  31,067
  40,765
  52,422
  66,176
  82,133
  100,367
  120,924
  143,819
  169,044
  196,575
  226,370
  258,382
  292,559
  328,851
  367,208
  407,593
  449,975
  494,334
  540,665
  588,974
  639,282
  691,623
  746,045
  802,609
  861,389
  922,473
Variable operating expenses, $m
 
  5,372
  7,787
  10,976
  15,078
  20,224
  26,538
  34,127
  43,080
  53,468
  65,339
  78,721
  93,626
  110,048
  127,970
  147,367
  168,207
  190,456
  214,082
  239,053
  265,343
  292,933
  321,811
  351,973
  383,422
  416,173
  450,247
  485,675
  522,498
  560,765
  600,530
Fixed operating expenses, $m
 
  103
  105
  108
  110
  113
  116
  119
  122
  125
  128
  131
  134
  138
  141
  145
  148
  152
  156
  160
  164
  168
  172
  176
  181
  185
  190
  195
  200
  205
  210
Total operating expenses, $m
  3,696
  5,475
  7,892
  11,084
  15,188
  20,337
  26,654
  34,246
  43,202
  53,593
  65,467
  78,852
  93,760
  110,186
  128,111
  147,512
  168,355
  190,608
  214,238
  239,213
  265,507
  293,101
  321,983
  352,149
  383,603
  416,358
  450,437
  485,870
  522,698
  560,970
  600,740
Operating income, $m
  1,827
  2,777
  4,069
  5,777
  7,973
  10,729
  14,111
  18,176
  22,974
  28,539
  34,900
  42,071
  50,058
  58,859
  68,463
  78,858
  90,027
  101,951
  114,613
  127,996
  142,086
  156,873
  172,350
  188,516
  205,371
  222,924
  241,186
  260,175
  279,911
  300,420
  321,733
EBITDA, $m
  1,874
  2,848
  4,172
  5,921
  8,171
  10,994
  14,459
  18,624
  23,539
  29,241
  35,757
  43,104
  51,286
  60,302
  70,142
  80,791
  92,233
  104,449
  117,421
  131,132
  145,567
  160,716
  176,572
  193,133
  210,401
  228,383
  247,092
  266,546
  286,765
  307,776
  329,611
Interest expense (income), $m
  0
  0
  40
  95
  167
  259
  375
  518
  689
  891
  1,125
  1,393
  1,695
  2,032
  2,402
  2,807
  3,244
  3,715
  4,217
  4,750
  5,313
  5,907
  6,529
  7,181
  7,862
  8,571
  9,310
  10,079
  10,879
  11,710
  12,573
Earnings before tax, $m
  2,010
  2,777
  4,029
  5,682
  7,806
  10,470
  13,736
  17,659
  22,285
  27,648
  33,775
  40,678
  48,363
  56,827
  66,061
  76,052
  86,783
  98,236
  110,396
  123,246
  136,773
  150,966
  165,821
  181,335
  197,509
  214,353
  231,876
  250,096
  269,032
  288,710
  309,160
Tax expense, $m
  304
  750
  1,088
  1,534
  2,108
  2,827
  3,709
  4,768
  6,017
  7,465
  9,119
  10,983
  13,058
  15,343
  17,836
  20,534
  23,431
  26,524
  29,807
  33,276
  36,929
  40,761
  44,772
  48,960
  53,328
  57,875
  62,607
  67,526
  72,639
  77,952
  83,473
Net income, $m
  1,679
  2,027
  2,941
  4,148
  5,699
  7,643
  10,027
  12,891
  16,268
  20,183
  24,656
  29,695
  35,305
  41,484
  48,225
  55,518
  63,351
  71,713
  80,589
  89,970
  99,844
  110,206
  121,049
  132,374
  144,182
  156,477
  169,269
  182,570
  196,393
  210,759
  225,687

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  5,264
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  8,396
  4,680
  6,785
  9,564
  13,138
  17,621
  23,123
  29,735
  37,536
  46,587
  56,930
  68,590
  81,576
  95,884
  111,500
  128,400
  146,558
  165,944
  186,529
  208,286
  231,193
  255,232
  280,394
  306,673
  334,075
  362,610
  392,299
  423,168
  455,252
  488,593
  523,241
Adjusted assets (=assets-cash), $m
  3,132
  4,680
  6,785
  9,564
  13,138
  17,621
  23,123
  29,735
  37,536
  46,587
  56,930
  68,590
  81,576
  95,884
  111,500
  128,400
  146,558
  165,944
  186,529
  208,286
  231,193
  255,232
  280,394
  306,673
  334,075
  362,610
  392,299
  423,168
  455,252
  488,593
  523,241
Revenue / Adjusted assets
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
  1.763
Average production assets, $m
  418
  627
  909
  1,281
  1,760
  2,361
  3,098
  3,984
  5,029
  6,242
  7,628
  9,190
  10,930
  12,847
  14,940
  17,204
  19,637
  22,235
  24,993
  27,908
  30,977
  34,198
  37,569
  41,091
  44,762
  48,585
  52,563
  56,699
  60,998
  65,466
  70,108
Working capital, $m
  4,396
  -470
  -682
  -961
  -1,320
  -1,771
  -2,324
  -2,988
  -3,772
  -4,682
  -5,721
  -6,893
  -8,198
  -9,636
  -11,205
  -12,903
  -14,728
  -16,676
  -18,744
  -20,931
  -23,233
  -25,649
  -28,177
  -30,818
  -33,572
  -36,439
  -39,423
  -42,525
  -45,749
  -49,099
  -52,581
Total debt, $m
  552
  1,144
  2,702
  4,758
  7,403
  10,721
  14,792
  19,685
  25,458
  32,155
  39,809
  48,437
  58,047
  68,635
  80,191
  92,697
  106,134
  120,480
  135,712
  151,813
  168,764
  186,553
  205,172
  224,619
  244,896
  266,013
  287,982
  310,825
  334,567
  359,240
  384,879
Total liabilities, $m
  2,870
  3,463
  5,021
  7,077
  9,722
  13,040
  17,111
  22,004
  27,777
  34,474
  42,128
  50,756
  60,366
  70,954
  82,510
  95,016
  108,453
  122,799
  138,031
  154,132
  171,083
  188,872
  207,491
  226,938
  247,215
  268,332
  290,301
  313,144
  336,886
  361,559
  387,198
Total equity, $m
  5,525
  1,217
  1,764
  2,487
  3,416
  4,582
  6,012
  7,731
  9,759
  12,113
  14,802
  17,833
  21,210
  24,930
  28,990
  33,384
  38,105
  43,145
  48,498
  54,154
  60,110
  66,360
  72,902
  79,735
  86,859
  94,279
  101,998
  110,024
  118,365
  127,034
  136,043
Total liabilities and equity, $m
  8,395
  4,680
  6,785
  9,564
  13,138
  17,622
  23,123
  29,735
  37,536
  46,587
  56,930
  68,589
  81,576
  95,884
  111,500
  128,400
  146,558
  165,944
  186,529
  208,286
  231,193
  255,232
  280,393
  306,673
  334,074
  362,611
  392,299
  423,168
  455,251
  488,593
  523,241
Debt-to-equity ratio
  0.100
  0.940
  1.530
  1.910
  2.170
  2.340
  2.460
  2.550
  2.610
  2.650
  2.690
  2.720
  2.740
  2.750
  2.770
  2.780
  2.790
  2.790
  2.800
  2.800
  2.810
  2.810
  2.810
  2.820
  2.820
  2.820
  2.820
  2.830
  2.830
  2.830
  2.830
Adjusted equity ratio
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260
  0.260

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  1,679
  2,027
  2,941
  4,148
  5,699
  7,643
  10,027
  12,891
  16,268
  20,183
  24,656
  29,695
  35,305
  41,484
  48,225
  55,518
  63,351
  71,713
  80,589
  89,970
  99,844
  110,206
  121,049
  132,374
  144,182
  156,477
  169,269
  182,570
  196,393
  210,759
  225,687
Depreciation, amort., depletion, $m
  47
  70
  102
  144
  198
  265
  348
  448
  565
  701
  857
  1,033
  1,228
  1,444
  1,679
  1,933
  2,206
  2,498
  2,808
  3,136
  3,481
  3,842
  4,221
  4,617
  5,029
  5,459
  5,906
  6,371
  6,854
  7,356
  7,877
Funds from operations, $m
  2,623
  2,098
  3,044
  4,292
  5,896
  7,908
  10,375
  13,339
  16,833
  20,885
  25,513
  30,727
  36,533
  42,927
  49,903
  57,451
  65,558
  74,211
  83,397
  93,105
  103,325
  114,048
  125,271
  136,991
  149,211
  161,937
  175,175
  188,940
  203,247
  218,114
  233,564
Change in working capital, $m
  382
  -156
  -211
  -279
  -359
  -451
  -553
  -664
  -784
  -910
  -1,039
  -1,172
  -1,305
  -1,438
  -1,569
  -1,698
  -1,825
  -1,948
  -2,069
  -2,186
  -2,302
  -2,416
  -2,528
  -2,641
  -2,754
  -2,868
  -2,983
  -3,102
  -3,224
  -3,350
  -3,482
Cash from operations, $m
  2,241
  2,253
  3,255
  4,571
  6,256
  8,359
  10,928
  14,003
  17,617
  21,794
  26,552
  31,899
  37,838
  44,365
  51,472
  59,149
  67,382
  76,159
  85,466
  95,292
  105,627
  116,464
  127,799
  139,632
  151,965
  164,804
  178,159
  192,043
  206,471
  221,465
  237,046
Maintenance CAPEX, $m
  0
  -47
  -70
  -102
  -144
  -198
  -265
  -348
  -448
  -565
  -701
  -857
  -1,033
  -1,228
  -1,444
  -1,679
  -1,933
  -2,206
  -2,498
  -2,808
  -3,136
  -3,481
  -3,842
  -4,221
  -4,617
  -5,029
  -5,459
  -5,906
  -6,371
  -6,854
  -7,356
New CAPEX, $m
  -165
  -209
  -282
  -372
  -479
  -601
  -737
  -886
  -1,045
  -1,213
  -1,386
  -1,562
  -1,740
  -1,917
  -2,092
  -2,264
  -2,433
  -2,597
  -2,758
  -2,915
  -3,069
  -3,221
  -3,371
  -3,521
  -3,671
  -3,823
  -3,978
  -4,136
  -4,299
  -4,467
  -4,642
Cash from investing activities, $m
  -2,026
  -256
  -352
  -474
  -623
  -799
  -1,002
  -1,234
  -1,493
  -1,778
  -2,087
  -2,419
  -2,773
  -3,145
  -3,536
  -3,943
  -4,366
  -4,803
  -5,256
  -5,723
  -6,205
  -6,702
  -7,213
  -7,742
  -8,288
  -8,852
  -9,437
  -10,042
  -10,670
  -11,321
  -11,998
Free cash flow, $m
  215
  1,997
  2,903
  4,097
  5,633
  7,560
  9,926
  12,769
  16,124
  20,016
  24,465
  29,480
  35,065
  41,220
  47,937
  55,206
  63,016
  71,355
  80,210
  89,568
  99,422
  109,762
  120,585
  131,890
  143,677
  155,951
  168,722
  182,000
  195,802
  210,144
  225,048
Issuance/(repayment) of debt, $m
  216
  1,144
  1,557
  2,057
  2,645
  3,318
  4,071
  4,893
  5,773
  6,698
  7,654
  8,628
  9,610
  10,588
  11,556
  12,506
  13,437
  14,346
  15,233
  16,100
  16,951
  17,789
  18,619
  19,447
  20,277
  21,116
  21,970
  22,843
  23,742
  24,672
  25,639
Issuance/(repurchase) of shares, $m
  -173
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  42
  1,144
  1,557
  2,057
  2,645
  3,318
  4,071
  4,893
  5,773
  6,698
  7,654
  8,628
  9,610
  10,588
  11,556
  12,506
  13,437
  14,346
  15,233
  16,100
  16,951
  17,789
  18,619
  19,447
  20,277
  21,116
  21,970
  22,843
  23,742
  24,672
  25,639
Total cash flow (excl. dividends), $m
  277
  3,142
  4,460
  6,153
  8,277
  10,879
  13,996
  17,662
  21,897
  26,714
  32,119
  38,108
  44,675
  51,808
  59,492
  67,712
  76,453
  85,701
  95,442
  105,669
  116,373
  127,551
  139,205
  151,336
  163,954
  177,067
  190,692
  204,843
  219,544
  234,816
  250,687
Retained Cash Flow (-), $m
  -1,295
  -404
  -547
  -723
  -929
  -1,166
  -1,430
  -1,719
  -2,028
  -2,353
  -2,689
  -3,032
  -3,376
  -3,720
  -4,060
  -4,394
  -4,721
  -5,040
  -5,352
  -5,657
  -5,956
  -6,250
  -6,542
  -6,833
  -7,124
  -7,419
  -7,719
  -8,026
  -8,342
  -8,669
  -9,008
Prev. year cash balance distribution, $m
 
  4,712
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  7,450
  3,913
  5,431
  7,348
  9,713
  12,566
  15,943
  19,868
  24,361
  29,429
  35,077
  41,299
  48,088
  55,432
  63,318
  71,732
  80,660
  90,090
  100,012
  110,417
  121,301
  132,663
  144,504
  156,829
  169,648
  182,972
  196,818
  211,202
  226,147
  241,679
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  7,143
  3,582
  4,726
  6,050
  7,529
  9,120
  10,771
  12,418
  13,994
  15,429
  16,657
  17,624
  18,284
  18,610
  18,589
  18,229
  17,550
  16,591
  15,399
  14,031
  12,547
  11,008
  9,471
  7,988
  6,600
  5,338
  4,224
  3,268
  2,469
  1,820
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

NetEase, Inc. (NetEase) is a technology company. The Company operates an interactive online community in China and is a provider of Chinese language content and services through its online games, Internet media, e-mail, e-commerce and other businesses. The Company operates through three segments: Online Game Services; Advertising Services, and E-mail, E-commerce and Others. Its online games business primarily focuses on offering personal computer (PC)-client massively multi-player online role-playing games (PC-client MMORPGs), as well as mobile games to the Chinese market. The NetEase Websites provide Internet users with Chinese language online services centered over three core service categories, which include content, community and communication. Its online advertising offerings include banner advertising, direct e-mail, sponsored special events, games, contests and other activities. It offers free and fee-based premium e-mail services to its individual users and corporate users.

FINANCIAL RATIOS  of  Netease ADR (NTES)

Valuation Ratios
P/E Ratio 553.2
Price to Sales 168.2
Price to Book 168.1
Price to Tangible Book
Price to Cash Flow 414.5
Price to Free Cash Flow 447.4
Growth Rates
Sales Growth Rate 67.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 10.7%
Cap. Spend. - 3 Yr. Gr. Rate 38.8%
Financial Strength
Quick Ratio 10
Current Ratio 0.2
LT Debt to Equity 0%
Total Debt to Equity 10%
Interest Coverage 0
Management Effectiveness
Return On Assets 23.4%
Ret/ On Assets - 3 Yr. Avg. 19.9%
Return On Total Capital 31.6%
Ret/ On T. Cap. - 3 Yr. Avg. 25.2%
Return On Equity 34.4%
Return On Equity - 3 Yr. Avg. 27.3%
Asset Turnover 0.8
Profitability Ratios
Gross Margin 56.7%
Gross Margin - 3 Yr. Avg. 62.6%
EBITDA Margin 37.2%
EBITDA Margin - 3 Yr. Avg. 40.6%
Operating Margin 33.1%
Oper. Margin - 3 Yr. Avg. 35.2%
Pre-Tax Margin 36.4%
Pre-Tax Margin - 3 Yr. Avg. 39.5%
Net Profit Margin 30.4%
Net Profit Margin - 3 Yr. Avg. 33.5%
Effective Tax Rate 15.1%
Eff/ Tax Rate - 3 Yr. Avg. 14.3%
Payout Ratio 21.9%

NTES stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the NTES stock intrinsic value calculation we used $5523 million for the last fiscal year's total revenue generated by Netease ADR. The default revenue input number comes from 2016 income statement of Netease ADR. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our NTES stock valuation model: a) initial revenue growth rate of 49.4% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for NTES is calculated based on our internal credit rating of Netease ADR, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Netease ADR.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of NTES stock the variable cost ratio is equal to 65.1%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $100 million in the base year in the intrinsic value calculation for NTES stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Netease ADR.

Corporate tax rate of 27% is the nominal tax rate for Netease ADR. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the NTES stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for NTES are equal to 7.6%.

Life of production assets of 8.9 years is the average useful life of capital assets used in Netease ADR operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for NTES is equal to -5.7%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $5525 million for Netease ADR - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 130.54 million for Netease ADR is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Netease ADR at the current share price and the inputted number of shares is $36.9 billion.

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COMPANY NEWS

▶ 3 Stocks for Future Millionaires   [Oct-12-17 09:38PM  Motley Fool]
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▶ ETFs with exposure to NetEase, Inc. : October 5, 2017   [Oct-05-17 11:13AM  Capital Cube]
▶ ETFs with exposure to NetEase, Inc. : September 25, 2017   [Sep-25-17 10:42AM  Capital Cube]
▶ Should You Buy NetEase Inc (NTES) Now?   [Sep-15-17 12:37PM  Simply Wall St.]
▶ ETFs with exposure to NetEase, Inc. : September 14, 2017   [Sep-14-17 06:45PM  Capital Cube]
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▶ NetEase: Buy the Dip?   [02:40AM  Barrons.com]
▶ NetEase Reports Second Quarter 2017 Financial Results   [Aug-10-17 11:25PM  CNW Group]
▶ Why NetEase Stock Plunged Today   [01:34PM  Motley Fool]
▶ Chinese Internet Stocks NetEase, YY Retreat   [04:36AM  Investor's Business Daily]
▶ NetEase posts 2Q profit   [Aug-09-17 11:32PM  Associated Press]
▶ Coming Up Wednesday: Earnings From 4 Major China Internet Companies   [Aug-08-17 11:12AM  Investor's Business Daily]
▶ Will NetEase Make It or Break It This Earnings Season?   [Aug-07-17 08:11PM  Motley Fool]
▶ Netease: What to Expect From Q2 Results   [Aug-02-17 11:35PM  Barrons.com]
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▶ ETFs with exposure to NetEase, Inc. : July 3, 2017   [Jul-03-17 03:33PM  Capital Cube]
▶ Put These 4 IBD 50 Chinese Plays On Your Stocks To Watch   [Jul-02-17 10:30AM  Investor's Business Daily]
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▶ ETFs with exposure to NetEase, Inc. : June 22, 2017   [Jun-22-17 04:06PM  Capital Cube]
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▶ While Not At Alibaba, Weibo Levels, This Chinese Stock Gets Upgraded   [Jun-20-17 04:07PM  Investor's Business Daily]
▶ Mulling A Stock Buy? Check Out These 5 Failed Tech Breakouts First   [Jun-16-17 04:20PM  Investor's Business Daily]
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▶ NetEase Hits Record High Despite Sell Rating; E3 Show On Tap   [Jun-08-17 04:19PM  Investor's Business Daily]
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▶ Three Momentum Stocks Breaking Out   [01:00PM  Investopedia]
▶ [$$] Tencent vs NetEase: Let the Games Begin   [May-29-17 08:38PM  Barrons.com]
▶ 3 Reasons NetEases Momentum Will Continue   [May-25-17 01:41PM  Motley Fool]
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▶ 3 Stocks That Feel Like Microsoft in 1986   [May-17-17 02:19PM  Motley Fool]
▶ NetEase Undervaluation Could Be Short-Lived   [May-14-17 09:15AM  Forbes]
▶ NetEase Handily Beats Earnings Views, Stock Jumps After Hours   [08:46PM  Investor's Business Daily]
▶ NetEase posts 1Q profit   [07:10PM  Associated Press]
▶ Will Snap, China's Internet Stocks Leap Like JD? Investing Action Plan   [May-09-17 04:43PM  Investor's Business Daily]
Financial statements of NTES
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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